Working Paper

The real exchange rate and foreign direct investment in the United States: relative wealth vs. relative wage effects

Abstract: There has been a significant correlation between inward foreign direct investment in the United States and the U.S. real exchange rate since the 1970s. Two alternative reasons for this relationship are that the real exchange rate affects the relative cost of production and that the real exchange rate alters reTative wealth across countries. In this paper we explore these alternatives by examining the determinants of four measures of inward foreign direct investment to the United States from seven industrial countries over the period 1979 to 1988. We find strong evidence that relative wealth significantly affects foreign direct investment in the United States. We find little evidence that relative wages have a significant impact on the determination of foreign direct investment in the United States. These results are robust to the choice of countries in our sample and when controlling for changes in tax codes.

Keywords: Investments, Foreign - United States; Foreign exchange rates;

Status: Published in Journal of International Economics 36, no. 3/4 (May 1994): 373-90.

Bibliographic Information

Provider: Federal Reserve Bank of Boston

Part of Series: Working Papers

Publication Date: 1992

Number: 92-2